Bank of England Governor Andrew Bailey has committed to modernizing the institution. Photo: Holly Adams/Bloomberg
The insular world of central banking is usually characterized by a clubby atmosphere, but Ben Bernanke did not take kindly to his colleagues at the Bank of England.
In his landmark review of the British central bank, the former chairman of the Federal Bank of England The US Reserve System blamed “outdated” IT systems, inexperienced staff and “outdated” financial data for leading to serious errors in the Bank's economic forecasts.
“Underinvestment” in key areas meant economists were overwhelmed with basic tasks such as data entry, with little time to consider the long term and the larger trends shaping the economy, or to improve the forecasting tools the Bank uses.< /p>
The review was commissioned after the Bank – along with other forecasters – failed to predict the severity of the cost of living crisis and, in turn, missed the sharp fall in inflation in recent months.
>Here are the main concerns outlined by the economist , Nobel Prize winner.
Information technology creaking
The key problem is the outdated IT systems that are still used by the Bank.
“The most significant issues we found in our review were deficiencies in the Bank's forecasting infrastructure – the tools that staff use to produce quarterly forecasts. and supporting analyses,” Bernanke said in his report. “Some key programs are outdated and lack important functionality.”
Officials and economists must process enormous amounts of constantly changing data, processing new information as quickly as possible to try to understand the economy and prepare new forecasts.
But using legacy systems requires economists to spend a disproportionate amount of resources. they spend time copying numbers from one system to another rather than analyzing the information for useful information.
“The process of combining different inputs into a forecast is becoming increasingly complex and requires a significant amount of staff energy and attention,” Bernanke said.
“ Steps that would ideally be performed automatically are instead performed manually.”
This is not the best use of time for the Bank's highly educated staff.
It also does not help policymakers understand the state of the economy and thus determine the best way to respond.
The Bank Governor said he was taking action: it had already begun £30 million system upgrade which will include moving to a cloud-based system IT setup.
Inexperienced staff.
The Bank also has a problem with inexperienced staff due to a broken career ladder.
If you want to get a big pay rise at the Bank of England, you'll have to move around within the organization.
Bernanke said current incentive structures encourage people to apply for jobs outside their current units if they want to. to climb the career ladder.
“From what I've heard from employees, the Bank is too prone to people jumping from one area to another,” he said.
While this helps people develop a “comprehensive understanding of the issues… I believe that in any given field more emphasis should be placed on experience.”
This is very important, especially when it comes to the Bank's main task of setting interest rates. As the review noted: “Staff with extensive experience in a particular area typically have greater subject matter knowledge and can interact with policymakers with more confidence.”
Bernanke put it more bluntly: “It's important to have people in key areas [who] understand the details and can stand up to an MPC member and say, no, you're wrong.”
The bank said it was working on “developing incentives for expert staff” to shape improvements, and “providing opportunities for progress through increased expertise.”
Late data
Perhaps most troubling of all were the problems Bernanke identified at the Bank. fundamental economic models.
The basic model, called Compass, has “various shortcomings,” Bernake said.
Some of them are staggering – the model did not include a detailed recreation of either the financial sector or the energy sector. Such lapses proved costly, first during the energy crisis and then during the inflation crisis.
The Compass also struggled to “fully reflect” how monetary policy works in practice and was overly optimistic, with a “tendency to predict too rapid a return of the economy to its steady state.” state equilibrium (including up to inflation of 2%).”
The gaps are filled in by other models and, increasingly, by the judgments of economists and politicians. According to Bernanke, this only “smoothes out the problems.”
Some of the data that goes into the models comes from financial markets, including traders' forecasts of future oil prices and interest rates. However, the deadline for collecting such data is a week before the Monetary Policy Committee (MPC) meeting.
This is simply too large a gap in today's economy, meaning the data is “out of date.” by the time policymakers consider the issue, the report says.
In its response, the Bank acknowledged that its models work well when the economy is stable, but struggle in difficult times.
The bank said: “A forecasting system that has performed well during periods when inflation shocks have been relatively small.” may be less resilient in periods of large and unusual shocks and associated increased uncertainty, or in economies transformed by structural changes such as the advent of artificial intelligence or realignment of trade relations.”
Confusing charts
For more than three decades, the Bank has used so-called fan charts to visualize the uncertainty surrounding its forecasts.
Economist Robert Choate called them “uncertainty flamethrowers” because of their bright orange and red colors. used in the Office for Budget Responsibility's own version of the multi-colored charts.
The charts are intended to convey to the public the range of opportunities and inherent challenges the Bank faces in making policy decisions.
This noble goal. But, as Bernanke noted, most people have no idea what they mean.
While the former Fed chairman acknowledged their “distinguished history,” he said they have a “weak conceptual basis and do not appear to be particularly effective.” communication tools.”
In short, they should be abandoned.
Policymakers should instead focus on one central scenario that tariff setters were willing to endorse while outlining the risks associated with this forecast. .
Bernanke said the current system has created confusion at times. For example, in November 2022, the Bank's central forecast predicted that the UK would fall into its longest recession on record due to rising prices.
However, policymakers did not support this forecast because it was based on market expectations of sharp growth prices interest rates. Bernanke said that communication issues bring more confusion than clarity.
“The man on the street thought the Bank of England was forecasting a recession, although that may not have been [policymakers'] main scenario. I think it's something to think about,” he said.
The Recession That Never Happened: The Five Biggest mistakes of the Bank of England Read more Problem solving
Bernanke left the Bank with 12 important recommendations and a lot of thoughts.
Bailey acknowledged that there is still a lot of work to be done: “We will take some time to thoroughly develop plans, but work has already begun and we will provide more information by the end of the year.”
The governor noted that IT reforms are “ high priority.” But this overhaul—and other problems—will not be easy.
“It's a little like fixing a car while it's running,” Bernanke said ominously.
Revising the fundamentals of the economic model will be difficult , since employees are already overloaded and must continue to provide regular forecasts to the MPC.
It also raises questions about changing the way careers are built at a 300-year-old institution that has a deeply ingrained culture among its academic staff.
But Bailey was keen to show he had an appetite for radical reform.
Bailey was keen to show, however, that he had an appetite for radical reform.
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“We have a once-in-a-generation opportunity to update our approach,” he said. “We need to adapt, evolve and ensure our forecast is as good as possible.”
It will be some time before the public can rely more firmly on the Bank's forecasts.
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Bailey Topics At the time, he calmed down somewhat, saying that economic forecasts were justified until the world economy was split by gigantic shocks.
“I hope I am not going to jinx it in any way. In that sense we are in a calmer environment at the moment,” he said.
“If you look at the Bank of England's approach pre-Covid, the forecast errors were in line with everyone else's forecast errors. , and they were much smaller. So that might reassure you.”
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